6 key takeaways:

  • Climate change is happening now, it is already damaging and dangerous, and it is human caused
  • The physical impacts of climate change are materialising faster than was previously expected
  • The impacts of climate events could be far reaching, deeply destabilising globally, and devastating for billions of people
  • It will be “impossible” to keep the Paris Agreement temperature target within reach if global emissions do not peak before 2025
  • Many modelled pathways will “overshoot” the carbon budget, necessitating deep, rapid abatement and mass scaling of emissions removals to achieve net zero
  • We have the means and the technology to deliver on the challenge, but unprecedented action is needed  now by all actors and sectors.

The new United Nations’ Intergovernmental Panel on Climate Change’s (IPCC) report on mitigating climate change has declared that to keep global warming to 1.5˚C global emissions must peak before 2025 and then decline rapidly by 43 percent by 2030 and 84 percent by 2050. Based on current climate commitments and pledges (i.e. in Nationally Determined Contributions), the world is not even close to being on track to meet the temperature target set in the Paris-Agreement. Yet the knowledge and technology required to meet the challenge exists. This is the final call to action before the door to 1.5˚C shuts, possibly forever.

The IPCC report confirms that climate change is at the top of the CEO agenda (as has the World Economic Forum’s Global Risks Report 2022, which cites 5 of the top 10 risks as climate- and nature-related risks). With the regulatory landscape already evolving at an unprecedented pace, businesses face a huge challenge – and opportunity – to rise to the occasion and decarbonise and adapt with the required urgency. The COVID-19 pandemic spotlighted just how nimble businesses and economies can be to re-organise en masse in the face of an existential crisis – a precursor and training ground to the global response needed to heed the IPCC’s call.

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The evolution of the IPCC’s warnings show that inaction cannot be an option

The IPCC’s new climate report completes the Assessment Report 6 (AR6) triumvirate that assesses global scientific evidence, adaptive capacity and mitigation pathways to avert the worst effects of climate change, noting that some damage is already baked in:

  • The IPCC’s first instalment (WGI) established the best available physical science on climate change and its impacts. It declared anthropogenic (i.e. human caused) climate change an unequivocal fact and set out the growing frequency and intensity of climate-related disasters such as wildfires, floods, droughts, landslides and sea level rises.
  • The second report (WGII) assessed society’s vulnerability to climate change impacts. It depicted an “atlas of human suffering without major adaptation efforts, especially for the half of the global population that already live in “contexts that are highly vulnerable to climate change”.
  • The most recent report (WGIII) – which incorporates changes in science and policy since the previous report (AR5) in 2014 – specifies the ambitions and rapid levels of mitigation that are required to maintain a >50 percent chance of staying at or below a 1.5˚C increase. This means that because of the stock of carbon already in the atmosphere, even if all of the IPCC’s recommendations and country commitments are implemented, a decent chance remains that the world will still heat beyond 1.5˚C, with all its attendant consequences. 1.5˚C is not a “safe harbour” as such, but a target that may contain the worst impacts of climate change. The WGIII findings and implications are explored further below.
    These three reports will form the basis of a Synthesis Report, scheduled for release in October.

The reports note that the impacts of climate change (both acute and chronic) are already escalating, increasingly with extreme manifestations, affecting our interconnected global systems. These trends accelerate the emergence of acute risks and their primary impacts (e.g. food security, water scarcity) that can result in international geopolitical and socio-economic vulnerability.

The IPCC’s pathways and solutions to stay within 1.5˚C involve deep, rapid, immediate GHG emission reductions

Rapid transformation is needed in all sectors 

The WGIII report describes a staggering breadth of change required to curtail global emissions – from all sectors and nations, immediately.

Predictably, the energy sector, being responsible for ⅓ of global emissions, is at the forefront of the challenge. The report is unequivocal in highlighting that further extraction of unabated fossil fuels will lock in emissions. The report finds that future emissions from existing and planned fossil fuel infrastructure will exceed the 500GtCO2 carbon budget that remains to align with a 1.5°C temperature pathway. The IPCC has thus called for vast and urgent decarbonisation, including by: retiring existing fossil fuel infrastructure; cancelling new and planned fossil fuel projects; retrofitting fossil-fuelled power plants with carbon capture and storage (CCS) technologies; and placing greater emphasis on electricity and lower-carbon fuels.

Other key sectoral findings include that: 

  • the services sector has the potential to reduce global emissions by 40-70 percent by 2030, by reducing air travel and ensuring swift deployment of electric vehicles.
  • synthetic fuels are emerging as a decarbonisation option for hard-to-abate transport systems like shipping and aviation, but greater financing and policy support is required to drive developments in this area.
  • buildings could potentially fully decarbonise by 2050, with action this decade being crucial for eventual success, requiring both retrofitting of existing buildings and ambitious policy packages.
  • cities and urban areas contribute substantially to global emissions, and must be re-designed for zero- and low-carbon transport.
  • achieving net-zero industrial CO2 emissions is possible, but “challenging”, requiring new production processes, electrification, and CCS.
  • there is “robust evidence” that the agriculture, forestry and other land use (AFOLU) sector could provide 20-30 percent of the emissions reductions needed by 2050, with rapid deployment of land-based measures being “essential in all pathways”. Measures with the highest potential impact include protecting and restoring forests and other ecosystems; soil carbon management; and improved livestock rearing – technologies that are readily deployable today, in contrast to other types of CO2 removal.
  • protecting and sustainably managing carbon-rich ecosystems can reduce emissions at relatively low costs, where deforestation alone accounts for 45 percent of emissions from the land sector. 
  • demand-side mitigation has the potential to reduce global emissions by 40-70 percent by 2050 compared to baseline scenarios, through changes in infrastructure use, end-use technology adoption, and socio-cultural and behavioural change.

Carbon removal at scale is critical, but massive action is needed today

The IPCC have found that carbon dioxide removal (CDR) is “necessary” in order to meet net-zero. They distinguish between different methods of CDR, including: “widely deployed” forms such as afforestation and ecosystem restoration; as well as other methods such as direct air carbon capture and sequestration (DACCS) and bioenergy with carbon capture and storage (BECCS), where experience is growing, but feasibility and cost constraints currently remain. The recognition that these technologies are indispensable for net zero presents a huge opportunity for organisations to channel investments into essentially future-proofed product and service offerings.

Demand-side mitigation must be part of the solution

The IPCC highlight that early action and demand-side solutions can minimise the need for CDR, specifically noting the importance of combining socio-economic factors, infrastructure design and technology adoption to support a shift to greener lifestyles. Energy efficiency and reduced demand remains a perennial strategy for relatively quick and cost-effective climate action.

The concept of lifestyle changes contributing to reduced emissions is not unprecedented, however, thematic chapters dedicated to demand-side mitigation options, including diets and consumption patterns, were included in a WGIII report for the first time. The report also notes with high confidence that “social influencers and thought leaders can increase the adoption of low-carbon technologies, behaviours, and lifestyles”.

Unprecedented levels of investment are needed for climate mitigation action

The IPCC have underscored that realigning global capital flows towards climate mitigation is crucial to the deployment of the technologies that are necessary to reduce emissions within the timeframe required by science. The report found that the shortfall in capital to do so is greatest in developing countries, in particular those countries with high debt, poor credit ratings and economic turmoil from COVID-19. It further found that those issues were intensified by the tendency for investors in developed countries to channel funds further into their own countries.

The report finds that there is scope for significant amounts of global funds to be redirected towards climate-beneficial projects: for instance, the report finds that public and private finance for fossil fuels still outstrips those sources of funding for climate mitigation and adaptation, and that some international development banks invest in new coal capacity. The report highlights that failing to re-allocate capital swiftly will likely result in trillions of dollars of stranded assets.

Broader implications for business responsibility and action

The IPCC report emphasises the need for major economic transformation, both to minimise the likely impacts of climate change and to adapt to new global realities. The transformation is now underway, spurred by growing levels of regulatory intervention, market expectations, and changing consumer and societal expectations.

Climate-disclosure obligations are evolving quickly

The climate policy and regulatory landscape is evolving rapidly at domestic and international levels. In the UK, regulatory and/or listing obligations to provide climate-related financial disclosures are rapidly spreading across the entire economy (see e.g. here ), covering premium and standard listed companies, asset owners and managers, large private companies and public interest entities. Momentum to legislate on the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD) is picking up in other European and Asia Pacific jurisdictions, and, in recent weeks, the US Securities and Exchange Commission (SEC) set out its vision for climate risk management and assurance.

At the international level, the announcement of the creation of the International Sustainability Standards Board (ISSB) at COP26 marked a major milestone for international cooperation on sustainability and climate disclosures, with the creation of global standards for voluntary adoption by businesses or transposition into domestic regulatory obligations, as the UK has indicated in its Greening Finance Roadmap.

These changes demonstrate the process of near constant regulatory extension and refinement, with governance, key performance indicators and risk management being increasingly joined by a keen focus on climate transition planning and the strategic considerations of how companies will decarbonise. In light of the IPCC’s warning, it is reasonable to anticipate the momentum to continue to build and greater pressure to be placed on companies’ environmental non-financial reporting.

Commercial considerations and expectations on climate action are accelerating the pace of change

With commercial valuation risks and low carbon opportunities increasingly understood, market expectations on how companies respond to and account for the climate crisis are shifting. In particular, asset managers and asset owners increasingly require businesses to be aware of and mitigate their physical and transition risks. Collaborative efforts, like the Glasgow Financial Alliance for Net Zero, have committed to align over £130 trillion in assets under management to the targets of the Paris Agreement.

As a result, climate change assessment and due diligence is likely to become critical for both transactions and corporate governance, with the new IPCC report giving further cause for lenders and insurers to consider companies’ climate readiness and commitments, which could be reflected in insurance premiums and access to capital. For example, the IPCC highlights that in the context of a 1.5°C scenario, coal assets are likely to be stranded before 2030 because of their exposure to climate risk, raising myriad questions for companies with exposure to this industry.  

The reputational risks to companies from climate change, though not new, will only be enhanced by the IPCC report and the availability of data, as well as by new reporting requirements. The trend for litigation in relation to corporate climate impact is also likely to grow. But heightened levels of public engagement on the climate crisis also present significant market opportunities to those who are able to deliver new products and services that address climate challenges and help to usher in the new low carbon world – in particular, according to the IPCC, options to produce clean energy and reduce energy demand.

The IPCC has shown that it is “now or never” to get on the path to net zero, and that the future of the planet, and our economies, rely on rapid and global curtailment of emissions, starting immediately. The collection of the three AR6 reports are clear on the physical science, the world’s vulnerability, and the risks that climate change poses. WGIII spotlights that the solutions are equally clear, and the time to act is now.

“The latest IPCC report presents a stark warning: failure to decarbonise rapidly and extensively will lead to significant warming that will be difficult to avoid. The climate risks are substantial, and so too are the opportunities, but the window to course-correct is shrinking. Much of the needed action will fall to CEOs, CFOs and CROs the world over.” – Stuart Bruce, KPMG Director and Independent Expert Reviewer of the AR6 WGIII report.